The clamor to ‘fix the housing affordability crisis’ grows louder with each passing week, and the debate surrounding housing affordability is as ill-informed as you might expect.

The incoming NSW Premier Gladys Berejiklian has listed housing affordability as one of her top priorities, and don’t expect political talk of the ‘crisis’ to go away any time soon.

And Treasurer Scott Morrison is flying to the UK to see if he can ‘solve the crisis’ half way round the world.

Mr Morrison is scheduled to meet with a slew of British officials this week including Chancellor of the Exchequer Philip Hammond, who in a landmark speech in November announced the doubling of capital expenditure on housing, including a £2.3 billion housing infrastructure fund.

2.3 billion pounds is a lot of money, but keep that number in mind… you’ll be seeing a far bigger one shortly, and it’s not coming from the Government.

I’m hoping to address the cost of buying and building in a future post, but today let me address the cost of renting. Most people on low incomes are renters, so if you care about the poor, you should care about the cost of renting.

The cost of renting a house is directly related to the cost of owning a house. Because someone owns the house and they are very sensitive to how much that house is costing them, even if (especially if?) they don’t live there. Added to the costs, are the risks. The more protections landlords have, the more of a financial loss they’ll be willing to accept in the short term. The more risks they have to accept, the more money they’ll demand.

In other words, step 1 to reducing the cost of renting a property (and ‘solving’ the ‘affordability crisis’) is reducing the cost of owning one. Step 2 is reducing the risks.

Trouble is, the costs to landlords keep going up, as do the risks. And for as long as that continues, the ‘housing affordability crisis’ will keep getting worse.

For this post let’s just talk about the risks.

I personally know two different people who own investment properties, one in Victoria and one in Queensland, who are struggling to evict tenants who haven’t paid for months. In one case the tenants have finally left, but they left behind lots of belongings and the owner is now obliged to give them time to come back and get them, then in a few weeks can eventually claim them as ‘abandoned goods’, then finally after what will be over 4 months of no income, they will get possession of the property back so they can clean it (the tenants left a mess), repair it (tenants left damage), and then finally rent it out again.

Landlords Insurance? Well unsurprisingly once you factor in the excess and the increase in future premiums, it’s barely worth it. And in any case, you can add the cost of ‘landlords insurance’ to the costs that owners have to pay, and therefore the price of renting.

The issue is that the law is heavily on the side of renters, with ‘good intentions’ of course. The government is ‘helping’… And as a result, landlords face high risks, and have to increase their rental income from the property to justify keeping it and to cover the costs of the rental insurance.

And it’s about to get worse, with Victorian rental laws under review, and the government widely expected to make things even riskier for landlords.

Victorian landlords fear growing risks may force them to sell their retirement nest eggs as the State Government moves to overhaul renting laws.

Flagged changes include ­removing “no pet” clauses, adopting five-year leases, introducing minimum standards and restricting rental increases to once a year.

The proposed reform has been welcomed by tenants and industry groups. However, ­investors fear the move could leave them on the hook for thousands of dollars in maintenance costs and remove safeguards against dodgy tenants.

Noel, 58, who has two properties in Melbourne’s west, said it was frustrating.

“I just see more and more risk,’’ he told the Herald Sun.

“As a landlord, I would be very concerned about having a rental property in Victoria. I would definitely be looking in a different jurisdiction.’’

Landlords have long been demonized as greedy, unfeeling, taking advantage of the poor, so some people will assume that anything that hurts landlords must be good for renters, but in fact the opposite is true. Every time the deck gets stacked further against the landlords, they have to pad their rents even more, or get out of the business of providing subsidized accommodation to others.

Subsidized? Yes, subsidized.

Remember that most renters are on low incomes, and cannot afford to buy a property of their own. Add to that that most landlords are losing money on their rental properties week-by-week. They are counting on capital growth to win out in the medium-to-long term. In fact  more than 50% of rental property owners are ‘negatively geared’, meaning the property is costing them more than it’s making them from a yearly cashflow perspective.

The 2013-14 year ATO taxation return statistics show a drop to 1.257 million people (or 62 per cent) declaring a net rental loss out of the 2.03 million persons that own an investment property.

The total amount of net rental loss declined from $12.04 billion to $10.97 billion which shows that more rentals across Australia were being positively geared than ever before. There is a year on year decrease in the loss made by a rental with lower interest rates supporting this outcome.

So 62% of all rental property owners are subsidizing the cost of housing their tenants.

Let me say that again.

62% of all rental property owners are subsidizing the cost of housing their tenants.

Let me say that another way, because this is the single most important thing you need to know in relation to solving the rental housing affordability crisis:

Wealthier people are taking a short-term loss to provide affordable housing for lower-income people, who would otherwise not be able to afford somewhere to live.

Got that?

So making owning investment properties riskier, making investing in shares or other things more attractive, and pushing wealthier people out of the investment property market isn’t going to hurt them nearly as much as it will hurt the renters who depend on them.

In fact according to those ATO figures, wealthier Australians subsidized the housing costs of poorer Australians to the tune of nearly $11B in 2013/14.

Again, let me put that to you another way:

There is a privately run, market based, housing affordability scheme which is willingly and voluntarily subsidizing housing for poorer Australians to the tune of $11B per annum. It’s called ‘owning a rental property’. And over 1.2 Million Australians contributed to it in FY13/14 alone.

But if you believe the rhetoric, they’re the bad guys! If you listen to politicians, especially (but not exclusively) in Victoria, you’d be forgiven for thinking that landlords are the worst thing that ever happened to renters.

Landlords make it possible to live in a house for less than it costs to own that house for that year!

But people don’t understand that this is the financial reality of the landlord-tenant relationship, and demonizing landlords has become a journalistic cliche.

We don’t need to fly overseas to know that low levels of supply, a growing population and the onslaught of investors are all to blame for rising prices – all you need to do is head to an auction on the weekend. [emphasis added]

That’s right, that evil onslaught of people who pay top dollar for a property, then spend the next 5 years losing money on it in the hope that in 10 years they’ll be able to cash out, make up for all their losses, and finally post a profit. Those evil investors who let people live in nice houses for less than it costs to keep them, and then get upset when renters stop paying, or trash their property, or object to an extra $10 per week when the landlord is losing far more.

And of course our government plans to ‘fix’ the housing affordability crisis by making being a landlord riskier. *facepalm*

They’ve been ‘fixing’ this for years, and it seems to be ‘working’. As the above figures show, there’s fewer landlords willing to lose money on a rental property these days, which means there’s fewer landlords willing to subsidize the housing costs of their tenants. And with the deck stacked so far against them, who can blame them? From FY 12/13 to FY 13/14 over $1billion in private sector subsidies for low income housing disappeared from the market, and it’s at least in part (I would argue mostly) because the government continues to drive up the costs and the risks of being a landlord.

Who was it that said that the most frightening sentence in the English language is:

I’m from the Government and I’m here to help.

You want to help the poor? Help renters? Help with the affordability crisis? Reduce the risks to landlords, reduce the costs (a subject for another post on another day, but stamp duty and rates are two obvious issues here), and watch the private sector pour even more billions into housing for the poor.

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